Notice - Request for Comment - Proposed Amendments to Multilateral Instrument 52-110 Audit Committees,

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Request for Comments

6.1.2 Notice - Request for Comment - Proposed Amendments to Multilateral Instrument 52-110 Audit Committees,
Form 52-110F1, Form 52-110F2, and Companion Policy 52-110CP

NOTICE
REQUEST FOR COMMENT

PROPOSED AMENDMENTS TO
MULTILATERAL INSTRUMENT 52-110 AUDIT COMMITTEES, FORM 52-110F1,
FORM 52-110F2, AND COMPANION POLICY 52-110CP

This Notice accompanies proposed amendments (the Amendments) to Multilateral Instrument 52-110 Audit Committees, Form
52-110F1 and Form 52-110F2 (collectively, the Audit Committee Rule) and to Companion Policy 52-110CP to Multilateral
Instrument 52-110 Audit Committees (the Companion Policy). The Amendments are being published for a 90 day comment
period by the securities regulatory authorities in every province and territory in Canada, other than British Columbia (the
Participating Jurisdictions).

Background to the Audit Committee Rule

The Audit Committee Rule and the Companion Policy were initiatives of the Participating Jurisdictions. The Audit Committee
Rule was adopted as a rule in each of Alberta, Manitoba, Ontario, Nova Scotia and Newfoundland and Labrador, as a
Commission regulation in Saskatchewan, as a policy in New Brunswick, Prince Edward Island and the Yukon Territory, and as a
code in the Northwest Territories and Nunavut. The Companion Policy was implemented as a policy in Alberta, Manitoba,
Ontario, Nova Scotia, Newfoundland and Labrador, Saskatchewan, New Brunswick, Prince Edward Island, the Yukon Territory,
the Northwest Territories and Nunavut. Both the Audit Committee Rule and the Companion Policy came into force on March 30,
2004. In Québec, the Audit Committee Rule will be adopted as a regulation made under section 331.1 of The Securities Act
(Québec) once it is approved, with or without amendment, by the Minister of Finance, and will come into force on the date of its
publication in the Gazette officielle du Québec or on any later date specified in the regulation. The Companion Policy will be
implemented as a policy in Québec.

The purpose of the Audit Committee Rule is to encourage reporting issuers to establish and maintain strong, effective and
independent audit committees. We believe that such audit committees enhance the quality of financial disclosure made by
reporting issuers, and ultimately foster investor confidence in Canada's capital markets. The purpose of the Companion Policy
is to provide interpretative guidance for the application of the Audit Committee Rule.

The Audit Committee Rule is based upon similar audit committee requirements applicable in the United States. In particular, it is
derived from the audit committee requirements administered by the U.S. Securities and Exchange Commission (the SEC), as
well as the listing requirements of the New York Stock Exchange (NYSE) and Nasdaq Stock Market.

Background to the Amendments

We have proposed the Amendments for two principal reasons:

(i) Clarification of the Definition of Independence

The Audit Committee Rule contains a definition of independence that is generally applicable to audit
committee members. In developing this definition, we attempted to parallel, as much as possible, the
definitions of independence applicable to members of audit committees of US listed companies. In the United
States, for an audit committee member to be considered independent, the member must satisfy two distinct
requirements:

(i) the member must be independent within the meaning of section (b)(1) of SEC Exchange
Rule 10A-3 (the SEC Independent Audit Committee Member Requirements); and

(ii) the member must be an independent director as defined by the listing requirements of the
applicable exchange or market (the Exchange Independent Director Requirements).

Our definition of independence (found in section 1.4 of the current Audit Committee Rule) was designed to
incorporate into a single set of requirements the key elements of each of the SEC Independent Audit
Committee Member Requirements and the Exchange Independent Director Requirements.

Concurrently with publishing this notice, the securities regulatory authorities in every jurisdiction in Canada
have also published for comment proposed National Policy 58-201 Corporate Governance Guidelines (the
Governance Policy) and proposed National Instrument 58-101 Disclosure of Corporate Governance


October 29, 2004 (2004) 27 OSCB 8859
Request for Comments

Practices (the Governance Disclosure Rule). The purpose of the Governance Policy is to provide guidance
on corporate governance practices. The purpose of the Governance Disclosure Rule is to provide greater
transparency for the marketplace regarding issuers' corporate governance practices. Both the Governance
Policy and the Governance Disclosure Rule use a definition of independence that is consistent with the
1Exchange Independent Director Requirements.

A primary purpose of the Amendments is to divide the existing definition of independence in section 1.4 of the
Audit Committee Rule into two separate sets of requirements: one corresponding to the SEC Independent
Audit Committee Member Requirements, and the other to the Exchange Independent Director Requirements.
This division permits a convenient cross-reference in the Governance Disclosure Rule and the Governance
Policy to the Exchange Independent Director Requirements contained in the Audit Committee Rule.

(ii) Update to the Definition of Independence

On August 3 and August 30, 2004, the NYSE filed SR-NYSE-2004-41 (the NYSE Amendments) with the
SEC, which proposes amendments to the corporate governance rules set out in Section 303A of the NYSE
Listed Company Manual. The NYSE Amendments make a number of changes to the NYSE’s corporate
governance rules, most importantly those dealing with “bright line tests” for director independence. The
Amendments reflect changes to the definition of independence that correspond to the changes proposed in
the NYSE Amendments.

We have taken this opportunity to also propose certain other minor amendments to the Audit Committee Rule
and Companion Policy.

Summary and Discussion of the Amendments

The Amendments contain the following significant changes:

1. Subsection 1.3(4) of the Audit Committee Rule – Change to the “Safe Harbour”

Subsection 1.3(4) of the Audit Committee Rule provides a “safe harbour” in connection with the determination of a
person or company’s status as an “affiliated entity”. Presently, that section states that a person will not be considered
to be an affiliated entity of an issuer for the purposes of the Audit Committee Rule if the person:

(a) owns, directly or indirectly, ten per cent or less of any class of voting securities of the issuer; and

(b) is not an executive officer of the issuer.

However, as drafted, this “safe harbour” is broader than intended. The Amendments therefore revise this section by
deleting the words “be an affiliated entity of” and substituting the word “control”.

In light of this change, the Amendments also include a consequential change to section 3.3 of the Companion Policy.

2. Section 1.4 of the Audit Committee Rule – Definition of Independence

The Amendments replace section 1.4 of the Audit Committee Rule with two new sections dealing with the meaning of
independence. As noted above, the existing definition of independence is an amalgam of the SEC Independent Audit
Committee Member Requirements and the Exchange Independent Director Requirements. However, to facilitate the
use of the Exchange Independent Director Requirements for both the Governance Disclosure Rule and Governance
Policy, we re-drafted our definition of independence into two sections, section 1.4 (which contains the Exchange
Independent Director Requirements) and section 1.5 (which contains the SEC Independent Audit Committee Member
Requirements). To be considered independent for the purposes of the revised Audit Committee Rule, an audit
committee member will be required to satisfy the requirements in both section 1.4 and 1.5.

In addition, the Amendments modify that portion of our definition derived from the Exchange Independent Director
Requirements in the following manner:

• we have revised certain of the prescribed relationships to more closely parallel those proposed in the
NYSE Amendments, (see subsection 1.4(3), generally, and paragraphs 1.4(3)(c) & (d) in particular)


1 The SEC Independent Audit Committee Member Requirements apply only in the context of audit committees.


October 29, 2004 (2004) 27 OSCB 8860
Request for Comments

• we have clarified the definition as it applies to part time chairs and their immediate family members,
(see subsection 1.4(7))

• we have removed the concept of a “prescribed period”, and replaced it with a simpler, clearer
transition provision which has the same effect, and (see subsection 1.4(4))

• we have added subsection 1.4(8), which indicates that for the purpose of section 1.4, a reference to
an “issuer” includes an issuer’s parent entity and subsidiary entities.